Saturday, February 27, 2010

Many Borrowers In Default Stay Put As Lenders Delay Evictions. Alana Semuels from L.A. Times writes "[d]espite being months behind, many strapped residents are hanging on to their homes, essentially living rent-free. Pressure on banks to modify loans and a glut of inventory are driving the trend". The primary reasons for this are not as sympathetic as it may seem. Banks do not want to maintain empty properties. By allowing former homeowners to stay, the cost of upkeep and maintenance is shared.

Homeowners Facing Worst Simply Abandon Homes. A news story by Thomas Olson of the Pittsburgh Tribune-Review puts a different spin on strategic defaults by focusing on the emotional costs. While describing the effects of homeowner's walk aways in Pittsburgh, he concludes with the following "Psychologist Rex Gatto, Mt. Lebanon, has counseled about 10 people in the last two years or so who walked away from their homes, 'which I had not seen before in my 25 years of practice,' he said, declining to name patients. 'The outcome is heightened anxiety and often, depression,' he said. 'When people lose their homes they also feel a loss of community and friendships, and if they have kids, a school district... all the things they belong to."

Tuesday, February 23, 2010

State laws regulate the actions that creditors can take when trying to collect on a secured loan. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency,” meaning that a creditor cannot hold the borrower personally liable for more than the value of the proprety at the time of sale. Generally, in a non-recourse state, if a lender cannot recoup its loan from the sale or seizure of the asset used for collateral, then the relevant state law will limit the lender’s ability to collect from the borrower.

In a non-recourse state, if you default on your home loan, the bank can only foreclose on the home. If the sale proceeds are not enough to repay the loan, the bank cannot take further action or the bank is limited on what it can collect. For example, in a non-recourse jurisdiction such as California, if a borrower owes a lender a $100,000 deficiency after the completion of a short sale or a foreclosure sale, under most circumstances the lender cannot get the money from the borrower. Each state implements “non-recourse” or “anti-deficiency” laws differently.

As of this writing, the following states have some form of non-recourse or anti-deficiency law:

There are also “one-action” states, which means that lenders are only permitted a single legal action to collect mortgage debt. Individual state laws vary. In New York, for example, a lender must choose between the actions of suing to collect the debt or foreclosing on the property. The following states have some type of one-action statute:

California, Idaho, Montana, Nevada, New York, and Utah.

In a recourse jurisdiction such as Ohio, if a borrower owes a lender a $100,000 deficiency after a short sale or a foreclosure sale, the lender can chase the borrower for the difference, i.e., get a personal judgment against a borrower. However, most recourse states have very strict rules governing the process of obtaining deficiency judgments. If a lender does not follow the rules in a recourse state, then it may not be able to obtain a deficiency judgment. For example, under New York State law, a lender must file for a deficiency judgment within 90 days after the foreclosure sale of the property.

Thursday, February 11, 2010

This is our regular update of current comments, articles, and news reports on strategic default.

This Business Week article and report by Brian Grow, Keith Epstein and Robert Berner is powerful stuff. Essentially, some insiders at the banks admit to the intentional delay in implementing strategies to stop the foreclosure crisis. This is somewhat of a behind the scenes look at the banks real resistance to mortgage loan modifications and principal reductions. Of course, the primary reason for resistance is nothing new: It can cost them a lot more money. Yet with a cadre of Washington lobbyists, moving in every congressional space, fighting against any effective foreclosure prevention legislation, it appears that the banks are having little problem achieving their goals. Add in the trillions of dollars in direct and indirect "bailout stimulus funds" given to the lenders. All you can hear is "Home Run!!".

This next article is smart and concise. The writer, Sharon Secor, touches upon an important issue raised by strategic defaults. There is a double standard regarding who or what can use a strategic default. It seems that individuals and small businesses are discouraged from considering a strategic default while big government, big business, and big financial institutions can implement a strategic default at anytime. She correctly points out the hypocrisy of the government and big business. Some of my favorite quotes from her article are:

“John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the 'message' they will send to 'their family and their kids and their friends,'...on February 8, 2010, TheStreet.com announced that the Mortgage Bankers Association was 'forced into' a short sale of their headquarters, accepting '$41.3 million, a little more than half the $79 million the group originally financed in 2007.' "

"The message from top top is clear, only the little people, the average Americans on Main Street, are bound by mortgage obligation to keep paying on properties that have lost a significant portion of their value, when it no longer makes financial sense to do so and they can no longer afford the loan payment"

Wednesday, February 3, 2010

The article continues a general trend. It seems that the media is very sympathetic to the reasons why homeowners strategically default, especially when some of the largest real estate companies strategically default. The biggest strategic default in history occurred when Tishman Speyer handed the "keys" back to the 110 New York City building complex known as Stuyvesant Town. The article tells the story of a homeowner. "In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid". The homeowner says "People like me are beginning to feel like suckers...Why not let it go in default and rent a better place for less?”

A recent piece in the Boston Globe takes a different perspective. In an essay posted by writer Scott Van Voorhis : The Hysteria Driving Strategic Defaulters, he essentially argues that the "shrewdness of the strategic defaulter" is questionable. In his opinion most people who strategically default are "an example of someone who blindly followed the housing bubble up and now is panicking when the chips are down." While there is some truth to his analysis, there is no denying the fact that a strategic default is an effective tool (when properly utilized). Furthermore, people, governments, and businesses blindly followed the credit bubble and now all are certainly panicking. AND ALL HAVE STRATEGICALLY DEFAULTED SOMEWAY OR ANOTHER.

So what should be done?

Articles on strategic default continue to describe the issues rather accurately but offer few solutions. I have discovered three certainties regarding the growing trend of strategic defaults. First, homeowners are fast becoming comfortable with the idea of strategical default despite the negative repercussions. Thus, we will see more strategic defaults. Second, banks are indignant and believe homeowners must honor their mortgage loan contracts at all costs. As the NY Times writer points out, banks believe "a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation...The banks are damned if they will help.” Third, it is very likely the federal government will be seen as the rescuer, the Bailout Knight.

To quote the NY Times writer: "using government money to [bailout banks from strategic defaulters and to bailout homeowners from underwater properties] would be seen as unfair by many taxpayers...on the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy."